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New Charges Against AOL

An Expanded Suit By The California State Teachers' Retirement System Sheds Light On Past Ad Deals

Nov 16, 2002 | AP A shareholder lawsuit against the nation's largest online provider of real estate listings now alleges that AOL Time Warner Inc. and Cendant Corp. were involved in a complex web of shady deals that contributed to Homestore Inc.'s financial woes.

A complaint filed Friday by the California State Teachers' Retirement System greatly expands an earlier lawsuit against Homestore.

It alleges that Homestore bought goods and services it didn't need from vendors, with the unwritten provision they would buy advertising on AOL. AOL (AOL: up $0.12 to $15.42, Research, Estimates) then forwarded most of the funds to Homestore through profit sharing and advertising deals, according to the lawsuit.

"It is beyond doubt that AOL knew the exact details of the deal and knowingly participated in Homestore's scheme to defraud the investing public," the lawsuit says.

At least four AOL executives knew about the deals, including Eric Keller and David M. Colburn, who allegedly agreed not to document some of the transactions to avoid a paper trail, the lawsuit says. Both executives have been dismissed by AOL, although the company has not said why. Neither could be reached for comment.

AOL's accounting practices also have come under scrutiny through an investigation by the Justice Department and the Securities and Exchange Commission. AOL has been reviewing its past financial statements and has since decided to wipe out $190 million in previously reported revenue.

AOL representatives declined comment on the lawsuit, saying they had not seen it. Homestore and Cendant Corp., a New York-based franchiser of hotels, rental car agencies and real estate brokerages, also declined comment.

The lawsuit had already named Homestore, five former executives, business partner L90 Inc. and PricewaterhouseCoopers, the accounting firm that certified Homestore's initial public offering in 1999 and then audited its financial statements.

It now also alleges that 19 companies helped Homestore inflate its revenue by $192.6 million in 2000 and 2001.

The companies' actions allowed Westlake Village-based Homestore to beat analysts' expectations and yielded its insiders more than $70 million in stock-sale profits, the lawsuit says.

Shareholders lost more than $1 billion, including $9 million by the State Teachers' Retirement System, according to Jack Ehnes, the organization's chief executive.

"This case started with a single-company focus, but it's blossomed into a corporate house of cards," Ehnes said. "This isn't just a few low-level employees at one company gone astray. This is corporate greed at the highest levels."

Federal charges also have been filed against Homestore executives.

Former Homestore vice president John Desimone pleaded guilty last month to a federal charge of insider trading, and two other former executives have pleaded guilty to federal charges of conspiracy to commit securities fraud and wire fraud. Their sentencing is set for April.

Prosecutors say that from March 2001 to December 2001, the company moved some of its money out, parked it with co-conspirators, then brought it back in, booking the money as new revenue.

Homestore supplies online technology tools and Web sites for buying, selling and renting real estate. Among the Internet sites it operates are, and

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